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Basic Question 1 of 4
Company X and Y are both in the automotive industry. They've both reported equal operating earnings. An equity analyst has identified the following after carefully examining their financial statements:
II. X has engaged in lots of related party transactions, while Y has not.
III. X has a higher management turnover than Y.
IV. The management of X has a bigger pressure on profitability.
I. X has reported disputes with and/or changes in auditors, while Y has not.
II. X has engaged in lots of related party transactions, while Y has not.
III. X has a higher management turnover than Y.
IV. The management of X has a bigger pressure on profitability.
Which statement(s) indicate(s) that the quality of Y's financial statements may be higher?
User Contributed Comments 5
| User | Comment |
|---|---|
| silvershine | How do u measure management turnover? Is it even in financial statement? |
| Nightsurfer | Look at the section on executive management. New faces mean turnover. |
| vi2009 | management turnover .. because they do not subscribe to the way the financial statement is being reported ... |
| avnik | I. statement looked to me like X has reported disputes, and Y has not even tough there WERE disputes to report |
| jejemike | All four options are absolutely correct because they reduce the financials of the firms . Option 1 suggests that firm X would have reported higher profits resulting in disputes with auditors as opposed to their actual performance Option 2 suggests that firm X could have under-reported or omit transactions since related party transactions are usually below fair value Option 3 suggests that frequent changes in management is due to poor management practices resulting in low quality financial reporting Option 4 suggests that the books of firm X could have been window dressed in a bid to meet up the pressures of high profit targets |
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Learning Outcome Statements
contrast absolute and relative valuation models and describe examples of each type of model;
describe sum-of-the-parts valuation and conglomerate discounts;
explain broad criteria for choosing an appropriate approach for valuing a given company.
CFA® 2025 Level II Curriculum, Volume 3, Module 20.